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Does your company comply with the new European sustainability reporting standards?

European sustainability reporting standards

European companies that are obliged to report on sustainability can now rely on guidance on how to prepare a sustainability report. Last week, the European Commission adopted common rules to standardise so-called non-financial reporting. These rules cover environmental, social and governance issues, such as climate change impact, respect for human rights and ensuring ethical conduct. This decision provides further clarity on the Corporate Sustainability Reporting Directive, adopted at the end of 2022, which saw the number of companies subject to this obligation almost quintuple from around 11,700 to more than 50,000, without defining the specific reporting guidelines they had to adhere to.

EU legislation requires all large companies and all listed companies, except micro-enterprises, to disclose information on what they consider to be the risks and opportunities arising from their activities on social and environmental issues. The European Commission, however, records “ample evidence that the sustainability information that companies currently report is not sufficient”, can be difficult to compare and is not always reliable – according to a question-and-answer document on the new rules released by the EC.

Aiming to address these problems, improve communication and performance management on sustainability issues, and thus facilitate access to sustainable finance, these rules – developed by the European Financial Reporting Advisory Group (EFRAG) – will guide all companies to report on the impacts of their activities on people and the environment on the one hand, and how social and environmental issues create financial risks and opportunities for them on the other.

Twelve specific European sustainability reporting standards

Whereas previously European legislation only referred generically to environmental, social and governance (ESG) criteria, the Global Reporting Initiative (GRI) standards or the UN Sustainable Development Goals (SDGs), companies will now have to follow 12 reporting standards. The first two set out the general principles to be applied to the report and the essential information to be disclosed regardless of the sustainability issue under consideration. The others cover different aspects related to the environment (climate, pollution, water and marine resources, biodiversity and ecosystems, resource use and circular economy), social issues (own workforce, workers in the value chain, affected communities, consumers, and end-users), and governance (business conduct).

The company will report only information that is relevant to its business model and activity. A robust assessment of what is relevant, however, will be required. If a company, for example, concludes that climate change is not a material issue and therefore does not report in accordance with that standard, it must provide a detailed explanation of the conclusions of its assessment with respect to climate change. This assessment will be made in accordance with the principle of dual materiality, i.e., considering impacts both inside and outside the company.

A phased implementation

The new reporting requirements will be introduced gradually. The European Commission will transmit its decision to the European Parliament and the Council for scrutiny in the second half of August. The monitoring period is two months, extendable for a further two months. After this period, companies will have to start reporting by adopting the new rules according to the following timetable:

  • Companies previously subject to the Non-Financial Reporting Directive (NFRD), i.e., large listed companies, large banks and large insurance companies, if they have more than 500 employees, as well as large non-listed EU companies with more than 500 employees: financial year 2024, with first sustainability statement published in 2025.
  • Other large companies, including other large non-EU listed companies: financial year 2025, with first sustainability statement published in 2026.
  • Listed SMEs, including non-EU listed SMEs: financial year 2026, with first sustainability statements published in 2027. Listed SMEs, however, can opt out of the reporting requirements for a further two years. The latest possible date for a listed SME to start reporting is the financial year 2028, with the first sustainability statement published in 2029.

In addition, non-EU companies that generate more than €150 million per year in the EU and have a branch in the EU with a turnover of more than €40 million or a subsidiary that is a large company or a listed SME will have to report on the group-level sustainability impacts of that non-EU company from the financial year 2028, with the first sustainability statement published in 2029. Separate rules will be adopted specifically for this case.

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